Cryptocurrencies: A Brief History and Recent (Legal) Developments

Digital currency has been around of many years now. It actually all started with Dr. David Chaum in 1982 with the publication of his paper ‘Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms’. This is an excerpt from the paper’s abstract: “A technique based on public key cryptography is presented that allows an electronic mail system to hide who a participant communicates with as well as the content of the communication – in spite of an unsecured underlying telecommunication system. The technique does not require a universally trusted authority.” (Chaum, 1982) These are the elements we recognize in the abstract:

Public key cryptography

Hide who a participant communicates with as well as the content

Universally trusted authority is not required

These elements can also be found in cryptocurrencies today, such as Bitcoin and Litecoin. So we can conclude that Chaum has laid the groundwork for digital currencies.

Traditional Privacy Model versus New Privacy Model

Then, in 1996, e-gold was founded by Doug Jackson. This currency was backed by actual gold and a few years later, a number of exchanges were started that supported this currency.

In 2008, Satoshi Nakamoto publishes the paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Satoshi Nakamoto (very likely not the real name of the author(s)) cites inter alia b-money (Day, 1998) and Hashcash (Back, 2002). However, up until that point, none of these digital currencies were really successful. With the publication of the Bitcoin paper and the release of the source code, digital currency evolved to a new level. In January 2009, Bitcoin v0.1 was announced publicly through the cryptography mailing list.

Bitcoin quickly gained in popularity and the price of one Bitcoin was continuously rising to reach 1 US Dollar on February 9th, 2011. Thanks to an increasing number of miners all over the world, as well as the launch of various exchanges and people/companies who accept it, Bitcoin now (January 2014) a market capitalization of around 10 billion US Dollar or around 7.38 billion EUR. Since the publication of the first version of the Bitcoin client, it has been improved by volunteers all over the world and is funded by donations from the public.

Because the source code of Bitcoin is accessible by anyone, it was only a matter of time until someone forked the project and started his own coin. These coins are called alternative coins or altcoins. We see a lot of them being created, but most of these altcoins were premined and the only goal of them is to make money; there is no intention to further develop the project at all or fundamentally change the system.

Litecoin and Bitcoin logo

But in October 2011, a former Google employee announced the launch of Litecoin, ‘a lite version of Bitcoin’. This new altcoin was introduced as following: “Litecoin is the result of some of us who joined together on IRC in an effort to create a real alternative currency similar to Bitcoin. We wanted to make a coin that is silver to Bitcoin’s gold. ” (Charlie Lee, 2011) What’s interesting about the announcement, is the comparison with silver, while Mr. Lee compares Bitcoin with gold. This altcoin really stands out compared to the others, since it is truly innovative and really has an added value compared to Bitcoin. And Litecoin hasn’t gone unnoticed, with Warren Togami, founder of the Fedora Project, joining the team.

I think we have seen some interesting improvements lately on both the Bitcoin and Litecoin projects. Since Litecoin has a strong development team and Litecoin being still heavily based on the Bitcoin source code, the Litecoin developers help on in improving Bitcoin too since both coins can profit from these improvements. Also financial help is provided.

Cryptocurrencies won’t go away any time soon, rather it will gain popularity in the future and will become a widely payment option in various contexts. I’m very eager to see what third-party projects will be set up that focus or work with Bitcoin and Litecoin.

The main question is still the regulation by the governments around the world. The video below shows Charles Lee answering questions regarding cryptocurrencies (and Litecoin in specific) at the New York Bitcoin hearing.